Barclays Capital: Trade deficit not as bad as it looks

Vietnam’s January-March trade deficit is US$3.5 billion compared with a surplus of US$1.5 billion in Q1 of 2009, but it is not as bad as it looked, says Barclays Capital. The British banking institution Emerging Markets Research comments that at first glance the trade gap looks sizeable, but it should be seen in the context of US$2.5 billion of foreign direct investment (FDI) disbursements and US$1.5 billion of remittances during the quarter. “On the currency front, the Vietnam dong grey market rate is trading fairly close to the official rate, which suggests forex demand and supply is more in balance. The closure of gold trading floors in the country and the pre-emptive weakening of the currency in February likely helped,” says the bank’s latest report on Vietnam’s economy. March exports, according to the report, are down 1.6% compared with a 2.4% rise last March. Exports of precious metals are down 98% given the high base from gold re-exports last year. Crude oil exports, which make up roughly 20% of the total, are forecast to fall 9.6%. However, the researchers say all other major exports have remained stable, with textiles picking up 8.2%, footwear growing 10% and fisheries expanding 14.5%. In terms of the other exports, rice shipments have declined  17% but electronics have climbed 41%, furniture has picked up 26% and rubber has risen by 104%, says the report. “Looking ahead, as the distortion from gold drops out, we expect exports to start rising in line with improved external demand.” March imports are up 37.6% compared with a 45% drop in Q1 of 2009, and the numbers are supported by a 33% rise in petroleum imports. According to the report, there is strong demand for cotton and electronics but both are intermediate goods that are used in exports. Imports of machinery have soared 11% compared with a 42% rise at the start of the year, thus the researchers have also seen steel and fertilizer imports ease. Barclays Capital economists write in the research report: “Demand for autos and motorbikes slowed substantially, a positive development, in our view. We believe that imports will stabilize given the policy tightening.” The State Bank of Vietnam has already tightened policy quietly by removing the 12% lending interest rate cap on medium- and long-term loans. According to newswires, lending interest rates are currently in the range of 18%-19%, which implies an effective tightening of 300-400bp. However, although the lending cap is 12%, the actual cost to customers is roughly 15% after taking into account extra processing costs.